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Give your charity superpowers with this dual strategy

When families and their advisers consider starting a charity vehicle, they often compare and contrast the benefits of private foundations and Donor Advised Funds (DAF). However, for many donors the best choice is neither a private foundation nor a CFO, it is both.

When used in combination, the benefits of a private foundation and a CFO can be synergistic, providing donors with a full range of options for their philanthropic and wealth management goals. Here are some of the benefits of using these two popular vehicles in tandem.

While a private foundation offers more control over grants and almost limitless capacity for ready-made giving, a donor-advised fund allows for convenient and anonymous granting. When donors have both vehicles, they have a complete toolkit to achieve their philanthropic goals.

Major gifts

Making a large donation to a charitable project or to a privileged institution represents an important commitment. To ensure that funds are used according to their wishes, including naming rights, donors may want to use a grant agreement – a legally binding document – to reflect the details of the pact with their grantees. Since private foundations are independent legal entities, they can enter into such agreements, setting out the purpose, terms and conditions of their grant, with subsequent payments often tied to milestones of progress.

This option is generally not available with a donor advised fund, as the account holders are not agents of the sponsoring organization and cannot enter into a legal contract on its behalf.

Balance transparency and discretion

Private foundations cannot donate anonymously, as they are legally required to record their grants on their tax returns, which must be available for public inspection. In most cases, this transparency is an advantage. In addition to contributing vital financial resources to an organization or cause, foundations can gain public attention (which in turn can attract more resources), building awareness and support.

There are situations, however, where giving publicly is not in the best interests of the funder. Sometimes funders prefer that their name not be associated with a grant, for example when the issue in question is outside the usual scope of their foundation’s mission. (For example, a funder may want to support a local school even though their foundation’s mission is global.)

To avoid confusing beneficiaries, the philanthropist can choose to contribute from a CFO, which offers flexibility and discretion. And some philanthropists fear their business or professional reputation may be linked to a controversial or politically charged issue. Since the sponsoring organization is not required to show which grants are associated with which DAF account, a DAF is ideal for giving gifts that require absolute anonymity.

Endless donation options

Donations from a donor advised fund are generally limited to simple donations to public 501 (c) (3) charities based in the United States. With the addition of a private foundation, donors have many more donation options, including:

  • Provide grants directly to individuals and families facing financial hardship, emergencies or medical distress.
  • Donate to foreign charities.
  • Provide loans, loan guarantees and equity investments in support of charitable purposes.
  • Provide funding to for-profit companies that support the charitable mission of the foundation.
  • Set up and manage scholarship and awards programs.
  • Run their own charitable programs.

In addition, in addition to offering more donation options, private foundations can reimburse members for reasonable and necessary expenses incurred in the pursuit of their charitable purpose. Expenses that the foundation can reimburse include board meetings, administration, site visits, travel expenses, and even costs associated with starting the foundation.

Options for enabling discretionary grants

Many philanthropists establish a charitable vehicle for the express purpose of uniting their families in shared and motivated work. But what happens when members cannot agree on a goal or wish to fund their own areas of interest?

In addition to the group grant, some families give their members a portion of the funds to be donated as individuals. A private foundation can facilitate this practice, formally called discretionary granting, to allow a certain degree of autonomy and reduce conflicts while promoting engagement. Alternatively, the family could create a donor-advised fund that members could use to fund their side projects. Since neither discretionary grant funds nor grants awarded by the DAF would go through an approval process by the foundation board as a whole, they could each serve as a “pressure relief valve” when individual interests threaten to derail the mission and the unit.

While private foundations can be funded with and hold a wide range of assets, CFOs offer a higher tax deduction for contributions as well as a higher total limit for combined annual contributions. The combination of the two charitable vehicles can generate the best possible financial result for the donor.

Maximize tax deductibility

The maximum that a donor can contribute to a foundation is 30% of the AGI. However, donors who have had a large liquidity event may want to exceed this limit. Since contributions can be made to both a private foundation and a public charity in a single year, additional cash contributions of up to
up to 30% AGI can be donated directly to one or more public charities, including DAFs.

By “stacking” contributions to a DAF and a private foundation, donors can effectively maximize their deduction. Note that the temporary suspension of the AGI cap on charitable deductions that applied in 2020 has been extended until 2021.

Financing with alternative assets

Private foundations can own almost any type of asset, including partnerships, real estate, jewelry, private stocks, stock options, artwork, policies. insurance and other valuables. A donor advised fund may limit investment options to cash equivalents, publicly traded securities, and mutual fund stocks. Donations of real estate and non-marketable securities are usually sold or liquidated by the sponsoring organization.

Having both a foundation and a CFO opens up a world of possibilities. For example, a DAF provides fair market value for a donation of long-term capital assets (eg, real estate, notes, and private stocks), while a private foundation provides a cost basis. However, since a private foundation can keep these assets and even use them for charitable purposes, there are other possibilities to consider.

Because no one can predict with certainty their future needs, creating both a private foundation and a donor-advised fund offers maximum flexibility. While the policies of DAF sponsoring organizations generally ensure that family control over a DAF eventually disappears, a private foundation is an independent legal entity built to last. If philanthropy becomes a family business, the foundation’s assets can be transferred from control of the founding generation to the next in perpetuity.

Finally, having both a private foundation and a donor-advised fund is ideal for donors to sustain their philanthropy. If a private foundation proves to be too heavy in the long run, the assets can be transferred to a CFO. However, if a DAF turns out to be too restrictive, it is practically impossible to do the reverse. Although DAF sponsoring organizations are allowed to make grants to private foundations, most have internal policies prohibiting such distributions. Therefore, if the donor “exceeds” the philanthropic and investment options of the DAF, the private foundation offers unlimited capacity. And if the first forays into philanthropy, usually started as a CFO, turned into a ‘second act’ for a retired donor or a family business that includes the next generation, the foundation can build a lasting legacy for generations. future.

After their father died, Mary and her brother John sold the majority stake in the family frozen food business to a multinational competitor. Proceeds from the transaction totaled $ 180 million, with each brother receiving half, or $ 90 million. As part of advanced planning efforts with her lawyer, Mary decided to open and fund a foundation with her share of the proceeds. And because the foundations are flexible and designed to operate in perpetuity, she was able to involve family members in the day-to-day operations and management of the board to ensure the foundation was creating a lasting impact in the region. Note: This example assumes the usual AGI cap of 60% is in place. He was temporarily suspended until 2021.

With the proceeds from the sale of the business, Mary’s AGI for the year totaled $ 91 million. Based on current tax laws, it could fund its foundation with up to 30% of its AGI, or $ 27.3 million. Mary also opened a DAF account to take advantage of the higher deductions allowed when donating to a public charity, also funding it with $ 27.3 million, resulting in a total tax deduction of $ 54.6 million, or 60% of its AGI. By putting 60% of her AGI from sales into charitable donation vehicles, Mary has minimized her tax obligations and accelerated her ability to raise vital funding for causes and people in the community.

Working with two vehicles gives it additional flexibility to set up its operational infrastructure and programs, knowing that the foundation can be passed on to its heirs. The DAF account can be spent and possibly closed.

Alexandra owned a warehouse worth $ 7 million. Although she considered selling it or donating it to her donor-advised fund, which would have immediately liquidated it, she instead decided to donate the warehouse to her foundation. Because the warehouse could be earmarked for charity to further her philanthropic goals, Alexandra was able to transform the property into an exhibition space and community meeting place for artists and art lovers like her. And because the foundation is using the warehouse for a charitable cause, its value will be excluded from the asset base used to calculate the 5% annual payment requirement, and the expenses or cost of capital improvements related to the property can be taken into account for its satisfaction.

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